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By Che Odom
The Internal Revenue Service may reintroduce regulations implementing the new federal partnership audit regime next month, according to a tax professional who is leading efforts to draft state-side model legislation.
However, panelists at a May 12 meeting of the American Bar Association’s tax section in Washington said that states might consider waiting for model laws before moving to conform.
The Bipartisan Budget Act of 2015 (Pub. L. No. 114-74), signed into law in November 2015, ushered in a new centralized system for federal audits of partnership entities. The default regime provides for assessments and adjustments at the entity level—rather than among individual partners—absent an election to “push out” liability to the partners.
During the meeting, panelists pointed to efforts underway by the Multistate Tax Commission (MTC) and other industry groups, to draft uniform statutes that states may decide to adopt rather than going it alone. However, states have been waiting for technical corrections and administrative clarity from the federal level.
Bruce Ely, a tax partner at Bradley Arant Boult Cummings LLP, said he’s heard from sources that regulatory guidance from the Internal Revenue Service might be re-released for public comment in June. Proposed regulations (REG-136118-15) implementing the new regime were released by the IRS in mid-January, but were withdrawn Jan. 20 when the White House announced a regulatory freeze shortly after President Donald Trump’s inauguration.
“And I doubt you’ll see any material differences between the new version and the old version,” said Ely, who is co-chair of a task force of the ABA tax section’s State and Local Tax Committee that is mulling model legislation for the states. “I understand they are working on the multi-tier partnership angle, but otherwise you’ll see these regulations in substantially the same form.”
The federal government wants to get the new rules in place by the end of the year, so they will need to be fast-tracked, Ely said. Though partnership audit regulations may be fast-tracked, actual audits probably won’t occur until 2020, Steve Wlodychak, a principal at Ernst & Young LLP who focuses on state, local and federal tax issues, said during the meeting.
States will want to require partnerships to report to them as soon as a federal audit is underway, but that seems to be unnecessary because the states would probably wait for resolution of the federal audit before beginning their own, Wlodychak said.
“Every single state is going to be different with respect to how they incorporate” the federal regime for partnership audits, he said.
However, Ely said that uniformity among state statutes would be helpful for taxpayers.
States will need to review their statutes and regulations, as very few even include partnerships in their definition of taxpayer, he added. So far, Arizona is the only state that has enacted legislation addressing the federal regime, which may be a good thing, according to Ely, a member of Bloomberg BNA’s State Tax Advisory Board.
Several “interested parties” are collaborating on model legislation addressing both procedures for reporting federal income tax changes and procedures for reporting changes under the new regime. Alongside the ABA State and Local Tax Committee, American Institute of CPAs (AICPA) and Council On State Taxation (COST), the parties include the Tax Executives institute and the Institute for Professionals in Taxation.
Ely noted that the MTC is also developing its own model statute.
“You could see dueling model acts,” he said.
Conformity is a matter of when, not if, because most states will see the federal partnership audit rules as an opportunity for more revenue, Zal Kumar, director of business tax services of New York City’s Department of Finance, told attendees of the ABA tax section meeting.
“New York state has a study group to look into conformity,” and it probably will conform, he said. “New York City is already prepared because it already collects tax at the partnership level.”
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